In this edition of CIO Insights, we provide an update on the continuing evolution of the investment landscape under the new administration. In prior editions, we discussed some of President Trump’s key policy proposals. Roughly six months into the new administration, we are better positioned to assess progress in a number of areas. In addition, we provide some perspective on the “Trump trade”—the ebb and flow of the stock market as expectations of successful policy implementation change.

RIP, BAT

One of the clearest policy outcomes so far is the death of the BAT—a border adjustment tax intended to shift the tax burden away from exporters and onto importers. Ultimately, the BAT appears to have been undone by fierce opposition from retailers, tepid support in Congress, and opposition from some members of the Trump administration itself. While House Speaker Paul Ryan remains nominally supportive of the BAT, enough opposition has surfaced for us to view its passage as highly unlikely. The low likelihood of such an event can already be seen in long-dated spreads between U.S. and non-U.S. crude oil futures, which have now reverted to pre-election levels.

Tax Reform—and Economic Stimulus—Less Likely

The trajectory of the BAT is instructive for the future of tax reform, as the complexity of the problem and the competing interests that appear to have resulted in the demise of the BAT are manifold in any attempts to overhaul the tax code. Certainly, we see tax reform as no less complex a problem and Speaker Ryan continuing to be challenged by vested interests across the business and political landscape. We believe these challenges and the slower-than-expected pace with which the administration is advancing its agenda makes realization of tax-cut-based stimulus in 2017 unlikely.

Health Care Remains an Open Question

Health care is another area where the legislative outcomes are highly uncertain. We continue to believe that the health care bill passed by the House of Representatives has little chance of becoming law in its current form, with the Senate effectively starting over. This is one area where our core belief bears repeating—better to focus on an individual company’s ability to generate and deploy capital than try to predict legislative and economic outcomes.

There are areas where President Trump is making more progress. One of these is deregulation of financial services, where a lower regulatory burden will benefit banks. However, the outlook here is mixed as well because the yield curve has flattened again after initially steepening on the outlook for faster economic growth. As such, while we continue to see banks benefiting from the new administration, the magnitude of that benefit is lower than predicted several months ago.

Looking Beyond the Trump Trade

Stocks initially rallied sharply following the election on the premise that Trump’s economic- and business-friendly proposals would quickly become law. The initial gains from the Trump trade tended to be on the value side of the growth/value divide. But as the political reality and difficulty of realizing Trump’s policy agenda became evident, we saw global/cyclical growth expectations recede.

As investor expectations have changed and economic growth has become more scarce, growth stocks have outperformed value since February. We don’t see much more to that relative performance of growth versus value stocks than that. To the extent that the tide has gone out on those economically sensitive trades, we think that performance will be more stock specific than universe specific from here.

Greg Woodhams, CFA, is a co-chief investment officer at American Century Investments, overseeing the investment team responsible for managing the global growth equity discipline. He also serves as a member of the investment oversight and asset allocation committees. Greg speaks Spanish, Portuguese and is learning Italian.

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